Abstract
The occurrence of speculative economic bubbles which has been noted from as early as the 17th century, has a devastating impact on investor wealth and the global economy. One such notable example is the Dot-com bubble which occurred during the end of the 1990s in the United States, in which seemingly irreversible increases followed by an equally dramatic decline in technology share prices were noted as a result of investor optimism in new internet and technology (.com) companies. It is well established that speculative bubbles are preceded by an abundance of liquidity and an extraneous event which leads to investor irrationality, such as the development of new technological ideas and services. As a result of ongoing 21st century technological innovations, similarities between the previous Dot-com bubble and the current conditions and market dynamics have been noted. This study aims to determine whether a second Dot-com bubble or a new speculative bubble is developing within the U.S. technology market. In order to address the research objectives and with reference to previous empirical literature, this study is divided into three areas of investigation. The first relates to the use of technical and fundamental analysis of U.S. indices which are benchmarked against overall U.S. market indices, in order to identify a similar bubble pattern to that of the Dot-com bubble. The second relates to an investigation of IPO underpricing levels, to determine whether the current levels are comparable to those noted during the Dot-com bubble period. The third relates to an investigation to determine whether the current conditions within the U.S. technology market such as federal interest rates and levels of venture capital investment are comparable to the conditions present during the Dot-com bubble period. The technical and fundamental analysis identified increases and deviations from the overall market, similar to that noted during the beginning of the Dot-com bubble. The latest increases and deviations are however supported by better fundamental values such as earnings. The IPO underpricing investigation showed that underpricing levels are similar to those that were noted during the first three years of the Dot-com bubble, but not elevated to the levels noted during its peak. The investigation of the U.S. technology market noted low interest rates and increasing levels of venture capital funding, suggesting that there are increased levels of liquidity within the U.S. economy, which is a contributing factor in sustaining speculative bubbles. These results suggest that although the public U.S. technology market, which includes the technology indices and IPO underpricing levels, resembles the beginning of the Dot-com bubble, and that this trend is supported by sounder fundamentals and that this does not constitute a speculative bubble. However, strong indications of a potential speculative bubble exist within the private technology market as a result of private technology companies with valuation metrics which exceed Dot-com bubble period levels. With this in mind, the research objectives of this study were achieved, and this study emphasises the importance of identifying potential speculative bubbles to proactively react or intervene, in order to minimise their potential damage to the global economy.
M.Com. (Financial Management)